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Wednesday, April 30, 2008

Today's capital gains tax rate of 15% is almost surely far below the rate that prevails at the peak of the long-run Laffer curve

Charlie Gibson's premise in his question for Barack Obama in ABC's much-maligned April 16 debate was just bogus. Toder writes:

In his question to Obama, Gibson also claimed that 100 million shareholders would be affected by a hike in the capital gain rate. But most of these shareholders hold assets in 401k plans, which are not subject to capital gains tax. In 2005, less than 14 million taxpayers realized taxable capital gains. And the vast majority of these gains are realized by very wealthy individuals—almost 60 percent by individuals with income over $1,000,000.

Holtz-Eakin trots out the tired old line that "Washington has a spending problem—not a revenue problem" and claims that McCain's plan will cut spending via earmarks (which I discuss in my previous post), by reforming health care (see donpedro's post below for more on this), and "a one-year discretionary 'pause' (freeze) of spending outside of necessary military and veterans accounts, an overall program review that would encompass defense procurement plans and methods and non-defense programs," for whatever that's worth.

But the present post is about Holtz-Eakin's response to the B&L scoring. Among Holtz-Eakin's chief complaints is that

The McCain plan constitutes only a "vision" for the future, one that will be phased in over years, and

Burman and Lesierson's scoring method is not useful because it "is dramatically influenced by the adoption of unrealistic congressional budgeting conventions"(underlining in the original).

Actually, if McCain's plan is only a "vision" and isn't really a plan at all--one with actual policies attached to actual dates--then no method of scoring will get things right in the pre-phased-in period. That's a problem for McCain and Holtz-Eakin, though, not one for analysts trying to figure out what the plan will cost. In the absence of a specific plan, it seems reasonable to see what the McCain plan would do when fully phased in, and that's what B&L have done.

Regarding Holtz-Eakin's complaint about unrealistic budgeting conventions, a key part is his criticism of the fact that Burman & Leiserson follow Congress in treating current law as the baseline rather than current policy. So since current law says the AMT is on the books, Burman & Leiserson treat it as future revenue and count McCain's plan to eliminate the AMT as a loss in revenue. But Holtz-Eakin says that that's silly, for example since everyone knows the AMT will be eliminated, since it's eliminated for many people every year on a year-by-year basis. But not for everyone. And that's the point.

The current-law figures are the way they are because Bush and the GOP Congress didn't have the guts or the votes (doesn't matter which) to make their array of tax cuts (to other policies besides the AMT, to be clear) permanent when they passed those laws. Holtz-Eakin now wants us to play make-believe, pretending that his guys got something through that was and still is highly contested politically. To be generous, this is a specious argument. (More generally, on the current law versus current policy dimension, it would imply that various GOP plans to "reduce the rate of growth" of Medicare is a cut, since it would reduce the benefits actually provided by the program--I'm not sure whether either Holtz-Eakin or McCain is on record on this issue, but it'd be worth a look, given Holtz-Eakin's love for current-policy scoring.)

One other point, which makes me wonder whether (a) I am failing to understand something, or (b) Holtz-Eakin has simply stopped thinking like an economist. Of the budgeting convention, Holtz-Eakin writes that

If households followed this practice, anytime a spouse planned to go back to work but changed his or her mind, the family would have to cut their spending to “offset” the planned future rise in income.

Actually, that's what rational households would do. Current and future consumption plans depend on what the budget constraint allows. If one plans to relax the budget constraint in the future, then one can consume more -- whether now or in the future. Conversely, if one tightens the budget constraint in the future relative to previous plans, then one needs to offset this tightening with reduced consumption, now or in the future, or with some other source of income increase.

For those unafraid of a little math notation, consider, for example, the analysis in section 3 (starting on page 8) of this paper that Holtz-Eakin coauthored back in 2000. In the paper, people choose between working as someone else's employee, being self-employed, and retiring. In all three cases, consumption ultimately equals income. To make my point, I need only consider the first and last cases.

In the paper, income for those who work as another's employee equals

where the i subscript indicates person i, w is the wage, h is hours worked, r is the interest rate, A is the person's assets, and Bw is the person's private pension benefits; note that I have just grabbed a screen-shot of the actual equation in Holtz-Eakin's paper. Now consider the same person's income if she chooses retirement. This person's income will be given by (again, screen-shot)

You can see that there are two differences between these two levels of income. First, benefits are different for retired people from their level for those who continue to work, i.e., Bw doesn't equal BR. Second, and more relevant to my current point, is that the person who chooses to work rather than retire has wage and salary income, given by the product of the wage, w, and hours worked, h. In his own paper, Holtz-Eakin, then considers foregone wage and salary income an important difference in the consumption opportunities that must be taken into account when a person decides whether to retire or keep working. (This paper doesn't have an explicit dynamic component, but that is beside the point--one that did would treat future and current income symmetrically, except in the case of liquidity constraints, which I don't think form the basis of Holtz-Eakin's complaint concerning how McCain's tax plan was scored.)

This paper was the first link that popped up when I typed "holtz-eakin retirement" into Google Scholar. It's not suprising that in that paper of several years ago, Holtz-Eakin understood quite clearly that foregone income due to reduced revenues must be taken into account. What seems odd is that he would now suggest that the same practice casts doubt on scoring rules, since it's actually the only rational way to budget.

McCain gave a speech on his health care plan yesterday which said very little. In this NY Times article, McCain's economic advisor Holtz-Eakin makes it clear that their political strategy is to avoid getting tied down on any details, so that the glaring flaws in the plan won't be quite so obvious.

Let's start with the one hard proposal McCain has made: he would tax employer-sponsored health insurance and create new tax credits--$5000 for a family and $2500 for an individual--for people who buy their own insurance. As Holtz-Eakin made clear in the talk I attended last month, this means that workers would have to pay taxes on the value of health benefits they received from employers. This is explicitly an attempt to kill the existing system of employer-provided care by dramatically increasing taxes on workers.

How would this work out for the typical worker? Consider this information from the most recent Kaiser Family Foundation study of health care costs:

In 2007, for a family the average total premium for a health care plan was $12,106, with $8824 paid by the employer. Let's say the McCain plan is enacted. What would happen to that average family if the employer continued to provide coverage (Scenario 1)? For a married couple filing jointly with income $63K-128K, the marginal tax rate is 25%, so they would face a tax increase of $2406 (25% of $8824).

But of course the intent of the McCain plan is to kill the employer-provided system. So let's say the McCain program is adopted and your employer drops your family's coverage (Scenario 2). What would happen? You would now have to foot the complete $12,106 bill for coverage, a $8825 increase over the employee-portion you're currently paying. This would be offset by a $5000 tax credit. So net, you would end up paying $3325 ($8825-$5000) more for your health care.

So, remarkably, McCain has managed to design a heads-you-lose, tails-you-lose program. Either your employer keeps your coverage, in which case you face a huge tax increase. Or your employer drops your coverage, and you face an even more massive increase in your out-of-pocket health-care costs.

The best-case scenario would be that employers who dropped coverage would then increase wages, compensating workers for the jump in what they have to pay for health care. In the long-run, there's a fair case to be made that this would happen, but as Keynes famously remarked, "In the long run, we're all dead," and the transition period would be extremely painful.

Strangely, although the plan is plainly an attempt to deep-six the employer-provided system, according to the NY Time article, "Mr. Holtz-Eakin said he believed that many employers would still offer health insurance to try to attract the best workers ..." If that's right, these workers would face a huge jump in their tax bill (see Scenario 1 above).

None of this gets to the key problem in McCain's plan: on the individual market, people with pre-existing conditions would be denied coverage. Here's the relevant part of the Times article:

Mr. McCain had previously described aspects of his health care plan but on Tuesday offered new details on how to cover people with existing health problems, in a nod to the growing concerns about the difficulties that many sick, older and low-income people have getting insurance.

Elizabeth Edwards ... recently pointed out that both she and Mr. McCain could be left uncovered by Mr. McCain’s plan because she has cancer and he has had melanoma. Stung by such criticism, Mr. McCain is trying to develop a way to cover people with health problems while still taking a generally market-based approach to solving the health care crisis.

“I’ll work tirelessly to address the problem,” Mr. McCain said in a speech here at the H. Lee Moffitt Cancer Center & Research Institute. “But I won’t create another entitlement program that Washington will let get out of control. I won’t do it. Nor will I saddle states with another unfunded mandate.”

For people who currently get health insurance through their jobs, Mr. McCain’s plan would give them a tax credit that they could put toward buying a different, and potentially less expensive, health insurance plan tailored to their needs — and allow them to keep that health plan, and their doctors, even if they switch or lose their jobs.

But Democrats and some experts said the proposal might lead some employers to stop offering health insurance, and questioned whether the tax credit would cover the cost of private insurance ....

Mr. McCain’s speech here implicitly acknowledged some of the shortcomings of his free-market approach. But rather than force insurers to stop cherry-picking the healthiest — and least expensive — patients, Mr. McCain proposed that the federal government work with states to cover those who cannot find insurance on the open market. With federal financial assistance, his plan would encourage states to create high-risk pools that would contract with insurers to cover consumers who have been rejected on the open market.

Mr. McCain was vague Tuesday about just how his safety net would be structured, and did not specify how much it might cost, leaving the details to negotiations with Congress and the states. But his top domestic policy adviser, Douglas Holtz-Eakin, said in an interview that the federal share could cost between $7 billion and $10 billion — money he said could be redirected from existing federal programs that pay for uncompensated medical care, mainly in hospitals.

Mr. Holtz-Eakin said that sum, when combined with contributions expected from the states and insurers, could provide coverage for the five million to seven million uninsured people that he estimates cannot obtain it because of their health or age.

These figures are nonsense on their face. If the federal government is going to subsidize a high-risk pool of 5-7 million people with $7-10 billion a year, the proposed subsidy is $1400 year. There is no way to this is going to be anywhere close to covering the extra insurance costs for a group that consists of old and sick people. Although McCain intentionally leaves out the details, the only place these extra funds could come from is from the states. In other words, although McCain says, "Nor will I saddle states with another unfunded mandate,” this is exactly what his plan would do.

Additionally, the 5-7 million is surely a vast underestimate of the number of people who would not be able to obtain health insurance in McCain-land. Anyone old, sick, or with a prior condition--a number that would easily be in the several tens of millions--would not be able to obtain insurance at anything other than obscene rates. Faced with no restrictions, insurers would cherry pick only the low-risk customers.

Overall, the McCain plan would raise taxes on workers in an effort to eviscerate the current health care system in the name of free market idolatry. To the extent it fails to completely destroy the existing system--as McCain's advisor anticipates--it would saddle the average family with $2400 in extra taxes to penalize them for having employer-sponsored care. And if the McCain plan succeeded in killing the current system, it would leave tens of millions unable to buy any care, until he comes up with some new safety net, details to be provided later, i.e. never.

UPDATE: It's now less clear to me that the credit would not be available to those with employer-based coverage. See this post and in particular my additional discussion in comments.

[McCain's] proposals would reduce federal revenues by about $5.7 trillion over ten years if they could be enacted immediately. Under a more realistic assumption that they don’t take effect until October 2009, the cost would be about $5.4 trillion. (Details of our calculations are in TPC table T08-0071.)

Cuts this size would pare government back to levels not seen since the Eisenhower administration. In FY 2012, tax revenues would be reduced by about $550 billion compared with current law (with the tax cuts expired). That is roughly equal to CBO’s baseline projection for all nondefense discretionary spending.

McCain’s proposal is $300 billion bigger than all of President Bush’s FY2012 tax cut proposals. Tax revenues would be about 16.8 percent of GDP. By comparison, spending this year is about 20 percent of GDP.

These estimates make one thing clear. Senator McCain plans a radical downsizing of government. Slashing pork, earmarks, and underperforming programs would offset only a fraction of the revenues. Cuts the size of those he proposes will require slashing discretionary spending and entitlements, and probably even reining in defense spending. Small wonder he has backed away from his earlier pledge to balance the budget—meaning that these tax cuts, like the ones signed by President Bush, will be paid for by our children.

I'd note further that, via Holtz-Eakin, McCain has already had to change his "definition" of those nasty earmarks he'll eliminate (somehow, without a line-item veto). According to this story by the Politico's Ben Smith, Holtz-Eakin initially claimed that there were $100 billion in earmarks in the current budget, the idea presumably being that eliminating all of these earmarks would give McCain $100 billion to work with in paying for his tax cuts. After a former senior Democratic staffer, Scott Lilly, pointed out that many of these earmarks included stuff McCain supports, like money for Israel, Egypt and U.S. military construction, Holtz-Eakin stated that in fact the real amount of money associated with earmarks McCain would not fund (again, magically preventing them without a line-item veto) was only $16-18 billion.

Supposing that US GDP for 2008 will be roughly $14.5 trillion, $16-18 billion amounts to a bit more than 0.1% of GDP. To say the least, that doesn't do much to dent the gap of 3.2 percentage points of GDP between today's spending share and the Burman & Leiserson scoring of McCain's plan (which, again, does not count the optional alternative tax provision).

It'd be hard to take McCain's economic plan seriously if it weren't for the 8 years of the Reagan Administration and the last 7+ years of the Bush Administration.

In light of that history, though, voters and reporters should start asking McCain some really hard questions. If this plan is ever enacted in anything like its proposed form, it will lead to a major deficit crisis, one that could easily spill over into exchange markets. The only conceivable way to finance it, as Burman & Leiserson note, would be via a radical change in what the U.S. government actually does. To my knowledge, McCain has not proposed specific and major structural cuts in Medicaid, Medicare, Social Security or--heaven forbid--military spending. No member of the media worthy of the title "journalist" can let McCain promote this fiscal plan without asking him which programs he will cut, massively.

As an economist, as a person who worries about climate change, and as someone who believes the Democratic Party's electoral success is very important, if only to spare us more of the damage that the GOP has done over the last quarter-century of its hammer lock on federal policy, I find political discussion of gas taxes to be extremely frustrating to watch.

Democratic politicians regularly use high gas prices as a club with which to beat Republicans. I understand that politicians use the issues they think will work. And the nexus between oil company profits and GOP officials whose policies have been awful for most people in the bottom four quintiles of the income distribution (and probably plenty in the top one) has got to be pretty tough for Democratic candidates and officials to resist.

But the fact of the matter is that gas prices should be high. They should be high for the very simple and now very obvious reason that the pressure on the world's climate needs to be reduced. Our country's foolish policy of keeping gas prices low while providing implicit (and sometimes explicit) subsidies to the vehicles that get the worst mileage should have ended many years ago. Demand-side pressure on gas prices is finally pushing gas prices into the range they should have been for many years.

But that last paragraph tells only part of the story. One effect of the low-gas price policies we've pursued for so long is that it's induced many people to buy very fuel-inefficient cars and trucks. These are the people who are getting nailed hardest in the wallets by today's high gas prices, and I don't blame them for being upset. If you drive a vehicle that gets 18 miles per gallon for 12,000 miles a year, then you use about 670 gallons of gas a year. Even a $1.00 per gallon increase in the price of gas over a period of one year alone therefore translates into more than the stimulus tax rebate that a single person with sufficient income will receive over the next month. A married couple each of whom drives such a car 12,000 miles a year will receive a smaller rebate than the one-year cost of a $1 per gallon gas price hike.

By any reasonable standard, the increase in gas prices translates into real money for a huge number of people in this country, especially under current economic conditions.

But since the reason this is true is that American consumers have been induced to buy inefficient gas guzzlers, with serious environmental consequences, policies that would reduce the price of gas should be the last thing we consider. (On this score, the gas tax holiday that Sens. McCain and Clinton have proposed at least has the virtue that it would likely do very little, leading toat most a very small change in the price of gas; McCain's proposal would add to the deficit by increasing windfall profits of oil companies, while Clinton at least has proposed a new windfall profits tax to undo her proposal's provision of windfall profits.)

So what to do? I propose the following two-pronged policy:

Prong 1. No change in the gas tax until the economy improves. At that point, we would begin to increase the gas tax annually by some fixed amount that would be stated in advance, allowing people to make informed car-purchase decisions. Consumers would shift consumption toward more fuel-efficient vehicles, and automakers would see this coming, so they would shift R&D toward such vehicles. Over time, the efficiency of the U.S. auto fleet would improve, cutting emissions and making us less dependent on all that foreign oil over which everyone always frets.

Prong 2. Every person who owns a car and files a tax return would receive a Gas Price Rebate (GPR). The amount of the GPR could vary with income if means-testing is desired to keep the overall cost of this program lower than it would otherwise be. However, the GPR would not vary according to the type of car people own. It could be set at something like

(12,000/avg MPG of U.S. fleet) x (the 2002-2008 change in the per-gallon price of gas)

We could adjust any particular component of the GPR. The point isn't the exact formula, but rather the fact that the GPR does not vary with the type of car that a person drives but does provide relief to the millions of Americans who responded to the bad incentives created by the misguided/chicken*$@# representatives the people themselves elected. People who want to keep driving those H2 and Mustang monstrosities (Ok, I admit it -- I used to drive a Mustang) can do so if they want, but they'll have to pay for it.

Thus, the two prongs together move incentives in the right direction (prong 1) while helping alleviate the real suffering going on out there due to gas price increases (prong 2). What I hope makes such a policy politically viable is the combination of the two elements. Yes, opponents will slam prong 1, but prong 2 is there as a retort.

As for paying for prong 2, some headway can be made with the increase in gas taxes in prong 1. It's a truism of microeconomic theory, though, that a tax-induced price increase will reduce equilibrium quantity, so it's likely that any GPR big enough to make prong 1 politically feasible will require additional funding. To deal with this, I propose ... you guessed it, an increase in taxes on upper-income Americans. And while I think the best way to do this would be those who make even more than I do, if need be, I'd be happy to pay more in taxes to help make this plan a reality.

Monday, April 28, 2008

My name is Jonah B. Gelbach, and I'm an associate professor of economics at the University of Arizona's Eller College of Management (it goes without saying that the opinions I express here are my own and do not necessarily represent anyone else's much less my employers'). I'd like to thank the good folks who started this blog for inviting me to contribute (actually, they invited me a couple months ago but by revealed preference I was more fired up than ready to go at that point).

I'm delighted to be an Obama supporter, and I'm also delighted to have the chance to contribute to this blog concerning various economic issues involved in the presidential campaign. I'll try to stay focused on economic policy issues, rather than more general political-junky stuff.

My first post, once I write it, will be on gas prices and gas taxes.....

I've been out of the country the last couple weeks and haven't had a chance to discuss in more detail the talk I attended with McCain's economic advisor, Doug Holtz-Eakin. Since then, McCain has released a detailed tax program, and the Tax Policy Center has released their analysis of the program. Then Holtz-Eakin responded to the Tax Policy Center post here.

According to the Tax Policy Center, McCain's plan--which would perpetuate the Bush tax cuts, eliminate the alternative minimum tax, and sharply reduce rates on corporate profits--would cut government revenue by $500 billion a year. This is a huge drop that's just unthinkable. It would require either explosive government deficits or dismantling much of what the government does. Currently, federal spending is about 20 percent of GDP. Under McCain's plan, revenue would be only 16.8 percent of GDP.

Holtz-Eakin would then appear to have an impossible job: justifying something that can't be done. In this Tax Policy Center response, he tries to do something he also did in his talk, but which I didn't understand when I first heard it. Paul Krugman explains it in his column today and Ezra Klein caught it when we saw Holtz-Eakin speak. Let me try my own brief explanation:

The Congressional Budget Office does its budget forecasts based on current law. Current law shows the Bush tax cuts expiring. Holtz-Eakin argues that since everybody "knows" the Bush tax cuts will be extended, the baseline should assume that they will, and that McCain's proposal should be judged against this "realistic" baseline rather than current law. By this logic, McCain's tax plan doesn't lead to huge deficits which threaten the government's solvency--we were already there with the "baseline" scenario, so it's not McCain's fault.

This kind of bogus logic can make your head explode. By this line of reasoning, McCain won't be responsible for the consequences of extending our stay in Iraq for 100 or 1000 years--since we're there already, indefinite occupation of Iraq is just the baseline scenario.

Holtz-Eakin used to have some cred among policy wonks as a serious, honest economist. Looks like he's decided to flush that down the drain.

I still have a couple more things to say about the Holtz-Eakin talk (including his response to my question!) I will write about these in the next couple days.

Sunday, April 27, 2008

As Dean Baker, pointed out, McCain's proposal for a summer "gas tax holiday" is just about as bad as policy can get. Since oil companies are already producing at full capacity, supply is essentially fixed, meaning that we're at the near-vertical portion of the supply curve, and the price is determined by demand, not supply. As a consequence, temporarily eliminating the gas tax will just just shift the vertical curve downward, resulting in no change at all in the price consumers face. I've drawn the relevant supply and demand curves below. The only effect of eliminating the tax is that the producer surplus increases, i.e. the value of the tax is now captured by oil companies rather than the government.Now, lo and behold, Clinton has embraced the same pandering proposal. Obama responded correctly:

Obama spoke out against halting a tax on gasoline during the summer months, a move supported by Clinton and presumptive Republican nomineeJohn McCain, saying it may not bring down prices and would deplete a fund used for building highways.

It was bad enough to see Clinton and McCain double teaming Obama with bogus attacks. It's even worse to see Clinton latch on to McCain's bad economics.

UPDATE: There's a post by Poblano at Daily Kos with more detail on this.

Under longstanding trade agreements, fuel for international freight carried by sea and air is not taxed...Under a little-known international treaty called the Convention on International Civil Aviation, signed in Chicago in 1944 to help the fledgling airline industry, fuel for international travel and transport of goods, including food, is exempt from taxes, unlike trucks, cars and buses. There is also no tax on fuel used by ocean freighters.

Since transport costs are a huge portion of the price of some goods (food in particular), this is a huge distortion, in effect a penalty against local production and a subsidy for a highly polluting activity.

With international food prices skyrocketing, it's the wrong time to try to start taxing fuel for international freight. But if it had been taxed before, many countries would have had stronger local food production and wouldn't find themselves as hard hit by the rise in international prices.

Saturday, April 26, 2008

Krugman said in his column yesterday that "general election polls suggest that [Obama] might well lose to John McCain."

The problem with his argument is that the same polls show that Clinton might lose as well. Or rather, both Obama-McCain and Clinton-McCain matchups show statistical ties. Here are the latest Gallup polls:I've always thought "electability" to be the wrong criterion for choosing a nominee, simply because there's so much uncertainty about the concept. We just don't know who will turn out to be more electable or not.

The argument that swayed many voters for Kerry in the 2004 primaries was that he was more "electable" than Dean, but in the end he apparently wasn't electable enough. Would Dean have had a better chance? Who knows? Likewise, while I'd like to think Obama is better poised to defeat McCain, I don't really know, and neither does anyone else. Rather than try to figure out who has the higher odds, it's much better to support the candidate you like the best.

Seeing Lerxst's last post, I spent a few minutes looking at the CQ Moneyline database to see what economists have donated to the Obama campaign. The names of many friends and colleagues popped up, but there just aren't many economists whose names are familiar to those outside the profession. Among the "famous" economists who have given to Obama (famous in the sense that anyone with a Ph.D. would know their names) are Ray Fair, Christina Romer, and David Romer. Ray is the originator of the Fair Model, which is the granddaddy of macroeconomic forecasting models. Christina is one of the top macroeconomic historians, and David is author of the most widely used advanced macroeconomic textbooks.

(Christina and David are married, and they have a son named Paul. Another Paul Romer, roughly of David's age, is a prominent economic growth theorist. David says that when is asked if he is related to Paul Romer, he likes to reply "Yes, he's my son.")

The most surprising thing that came up in my brief search is that Larry Lindsey, formerly Bush's chief economic advisor, gave $1000 to Hillary in February. He also gave $1000 to Biden's campaign in November and $2300 to Fred Thompson's campaign last August. I think the only way to understand this bizarre constellation of donations is to note that he's currently CEO of an economic advisory group. The money for Hillary and Biden has nothing to do with Lindsey's preferences and everything to do with buying access to their Senate offices.

Friday, April 25, 2008

MSNBC has two Nobel Prize economists on right now. They were asked which of the three - Obama, Clinton or McCain - would be best for the economy, and both replied Obama.

Joseph Stiglitz, who was connected to the Clinton presidency and a 2001 prize winner, said that Obama's speech 3 weeks ago on the economy was brilliant. He also said that the deregulation of the markets during Clinton's presidency was a mistake and the markets need to be re-regulated.

Edmund Phelps, 2006 prize winner, agreed. We need a new way of looking at the economy and Obama is the one that can do that. We do not need the thinking of the past.

Monday, April 21, 2008

MoveOn is running a contest for which people have submitted their own Obama ads. Here is one submitted by one friend and a second submitted by another friend. When you go to the website, if you like the ads, enter your e-mail address to have your viewing of the ads count as a vote. The finalists will be selected among those that have the most viewings.

Sunday, April 20, 2008

This article by behavioral economics whizzes Richard Thaler and Cass Sunstein, offers some great ideas which I believe might actually get enacted in an Obama administration. They write:

The problem now is that both mortgages and credit cards have rates that vary over time, and numerous other fees that are difficult to understand....

The best response would make use of modern technology to create a Truth in Lending Act for the 21st century.

In brief, government would achieve simplified transparency by requiring all lenders to provide borrowers with an electronic file that contains, in standardized form, information on every feature of the contract.

Instead of fine print, there would be electronic information. And because disclosure would be standardized, consumers could easily compare one mortgage, and one credit card or school loan proposal, with many others.

Now, you might wonder, how do these electronic files, even if standardized, help us mortals who have trouble learning how to record a TV show on a VCR? The answer would come through the market.

As soon as the government required electronic disclosures, websites would quickly emerge to help people in the task of comparing offerings. A borrower would go to "mortgageevaluator.com," upload the relevant quote, and receive an easy-to-understand analysis of the loan they have been offered, plus other loans that they might consider.

The same approach could be used in other domains, from cellphone calling plans to Medicare prescription drug coverage.

This proposal illustrates the essence of good policymaking from the standpoint of behavioral economics. Government does not tell people what to do. Instead, it tries to improve markets by making it easier for busy people to make good decisions.

This sort of policy fits very well with the make-your-life-simpler "Ipod government" model that Obama advisor Austan Goolsbee has discussed.

Monday, April 7, 2008

I'm just back from this event at the Urban Institute with Doug Holtz-Eakin. There were few memorable moments, as Holtz-Eakin avoided getting tied down on anything specific. The host, Howard Gleckman, did an admirable job of trying to get him to be concrete, but to little avail.

He did make a few inflammatory statements, though (or at least inflammatory as an economic advisor can get). In a discussion about health care, he said "All you have to do is look at the Medicare program to know what's wrong with American health care." This would come as news to the millions of Americans who are quite happy with their care under Medicare. (Note to self: look up polling data on satisfaction with Medicare.) There was a lot of discussion on health care, the need for technology, better service delivery, etc. but I didn't hear any tangible policy proposal other than doing away with the some tax benefits for employer-provided health care and instituting new credits. He did clarify something which I had misinterpreted before. McCain's website says that he proposes to "reform the tax code to eliminate the bias toward employer-sponsored health insurance." According to Holtz-Eakin this does NOT mean that the employer will no longer be able to deduct health insurance costs, as I had previously guessed. Rather, it means that the employee will now have to pay taxes on health insurance benefits provided by the employer. (Currently these benefits are not subject to tax.) In other words, in order to try to kill the current employer-based system, he would raise taxes for anyone who receives health insurance from their employer.

Friday, April 4, 2008

As I've made clear in previous posts, I favor the U.S.-Colombia free trade agreement. But what the WSJ reports today is really obscene. Clinton's top advisor, Mark Penn, is CEO of the lobbying firm hired by the Colombian government to push for passage of the accord. Penn's roles as lobbyist and campaign advisor are so indistinguishable that when the Colombian ambassador met with Penn on Monday to talk about the agreement, the ambassador didn't know whether Penn was representing the campaign or the lobbying firm.

Tuesday, April 1, 2008

Tavis Smiley made a good point on Bill Maher's show last Friday. Some of the rhetoric for which Rev. Wright has been criticized is similar to things MLK said in what I previously identified as his best speech, "Why I Am Opposed to the War in Vietnam." Here a couple excerpts:

As I have walked among the desperate, rejected, and angry young men, I have told them that Molotov cocktails and rifles would not solve their problems. I have tried to offer them my deepest compassion while maintaining my conviction that social change comes most meaningfully through non-violent action; for they ask and write me, "So what about Vietnam?" They ask if our nation wasn't using massive doses of violence to solve its problems to bring about the changes it wanted. Their questions hit home, and I knew that I could never again raise my voice against the violence of the oppressed in the ghettos without first having spoken clearly to the greatest purveyor of violence in the world today: my own government....

Let me say finally that I oppose the war in Vietnam because I love America. I speak out against this war, not in anger, but with anxiety and sorrow in my heart, and, above all, with a passionate desire to see our beloved country stand as the moral example of the world. I speak out against this war because I am disappointed with America. And there can be no great disappointment where there is not great love. I am disappointed with our failure to deal positively and forthrightly with the triple evils of racism, economic exploitation, and militarism. We are presently moving down a dead-end road that can lead to national disaster. America has strayed to the far country of racism and militarism. The home that all too many Americans left was solidly structured idealistically; its pillars were solidly grounded in the insights of our Judeo-Christian heritage. All men are made in the image of God. All men are brothers. All men are created equal. Every man is an heir to a legacy of dignity and worth. Every man has rights that are neither conferred by, nor derived from the State--they are God-given. Out of one blood, God made all men to dwell upon the face of the earth. What a marvelous foundation for any home! What a glorious and healthy place to inhabit. But America's strayed away, and this unnatural excursion has brought only confusion and bewilderment. It has left hearts aching with guilt and minds distorted with irrationality.

It is time for all people of conscience to call upon America to come back home. Come home, America. Omar Khayyam is right: "The moving finger writes, and having writ moves on." I call on Washington today. I call on every man and woman of good will all over America today. I call on the young men of America who must make a choice today to take a stand on this issue. Tomorrow may be too late. The book may close. And don't let anybody make you think that God chose America as his divine, messianic force to be a sort of policeman of the whole world. God has a way of standing before the nations with judgment, and it seems that I can hear God saying to America, "You're too arrogant! And if you don't change your ways, I will rise up and break the backbone of your power, and I'll place it in the hands of a nation that doesn't even know my name. Be still and know that I'm God."